4 Quotes That Suggest This Economy May Not Be So Hot
October 17, 2013
The stock market’s recent performance has been puzzling to say the least. Not only are valuations stretched, but it seems like with each passing trading session, the broader equity market manages to edge out new highs (regardless of underlying business fundamentals). Though we’re happy to see the market march ever higher, a number of firms on our radar have issued some cautionary comments that are worth noting. Over the intermediate- to- long-term, corporate fundamental outlooks will trump any near-term rise in sentiment caused by the re-scheduling of yet another debt ceiling debate (this one now scheduled for February 7). We’re paying close attention to corporate activity. IBM (IBM) “From a geographic perspective our challenge this quarter was in growth markets,
Rio Tinto Says Iron Ore Production Breaks Record; Iron Ore Prices Recover
October 17, 2013
On Tuesday, mining giant Rio Tinto (click ticker for report: ) issued impressive third-quarter production results that revealed record production and shipments of Western Australia iron ore thanks to the opening of its Pilbara 290 port and rail expansion (ahead of schedule and significantly under budget). We think this good news has only been sweetened by the recent recovery in iron ore prices, following a near-term bottom in early June. It’s important to note, however, that iron ore prices remain in a defined downtrend, and while we view the recent pricing performance as positive, we’re not celebrating just yet. Image Source: http://www.indexmundi.com/commodities/?commodity=iron-ore&months=60 Still, fundamentals are starting to brighten up just a bit for the mining group. Economic performance in China
Get To Know Yahoo!’s Management; We Value Alibaba at $75 Billion
October 16, 2013
The only question that comes to mind after looking at the below slide is: What turnaround? Image Source: Yahoo GAAP revenue down 5%. Revenue ex-TAC down 1%. Adjusted EBITDA down 19%. Income from operations down 39%. Non-GAAP operating income down 27%. Net earnings down 91%. EPS attributable to Yahoo down 89%. Non-GAAP EPS down 13%. Free cash flow down 73%. Cash and marketable securities down 66%. It’s flat-out puzzling that CEO Marissa Mayer included the following statement in the third-quarter press release: “I’m very pleased with our execution, especially as we’ve continued to invest in and strengthen our core business.” We understand the importance of staying positive, but her statement is quite a stretch considering actual financial performance at the core Yahoo business. The only line item in
Surveying the Cola Companies’ Third-Quarter Results
October 16, 2013
Coca-Cola (KO) On Tuesday, Coca-Cola (click ticker for report: ) announced decent third-quarter results that showed global volume expansion and share gains in North America for both the sparkling and still-beverage categories. Though reported revenue declined 3% in the period, revenue – adjusted for structural changes and currency – advanced 4% in the quarter. Likewise, comparable currency-neutral operating income jumped 8%, driving comparable earnings per share growth of 4%. Free cash flow generation of $6.1 billion year-to-date represents 17% of sales. Coca-Cola Americas grew volume 1% in both the quarter and year to date, with North America volume up 2% and Latin America volume even in the quarter. Coca-Cola International grew volume 3% in both the quarter and year to
Abbott’s Expansion Slowed By Supplier Recall; Raises Dividend
October 16, 2013
On Wednesday, Abbott reported mixed third-quarter results as a supplier recall in August in its ‘International Nutrition’ business forced revenue to come up just a bit short of expectations. The firm’s top-line still advanced 4.3% on an operational basis led by strength in its ‘Diagnostic’ segment, where revenue jumped more than 10% on an operational basis (shown below). Image Source: Abbott Its ‘International Nutrition’ business revealed sales expansion of 3.4% on an operational basis – not a terrible showing, but a marked slowdown from the 7% growth rate recorded during the first nine months of the year (third quarter inclusive) and the 8.4% pace registered in the second quarter. Though we’re not too worried about this hiccup, we note the market disruption
Intel Delays Broadwell; Stay Focused on Tremendous Dividend Strength
October 16, 2013
On Tuesday, Intel (click ticker for report: ) reported solid third-quarter results that were overshadowed by a minor one-quarter delay in the release of its next-generation Broadwell chip. We’re not reading too much into the modest setback and continue to be happy with the firm’s excellent cash-flow generation and significant financial flexibility. During the period, Intel generated $5.7 billion in cash from operations (42% of sales) and about $2.8 billion in free cash flow (nearly 21% of revenue). These are staggeringly positive numbers for a firm dealing with a PC market that is in secular decline. Intel is also sitting on $19 billion in total cash investments (cash, short-term investments and trading assets) relative to $13.2 billion in long-term debt,
The Power of a Valuentum Buying Index Score of 1: J.C. Penney and Domino’s Pizza Nosedive
October 15, 2013
J.C. Penney (JCP) We believe J.C. Penney (click ticker for report: ) is one of the most overpriced – if not, the most overpriced – stock on the market today. Based on our cash-burn analysis, we think the firm has sufficient liquidity to remain a going concern only through mid-2014, where the threat of bankruptcy will become severe (absent a significant change in the trajectory of cash flows). The firm’s shares register the worst score of a 1 on the Valuentum Buying Index and are suffering greatly today. We expect downside to the low-single-digits per share and perhaps worse. Our fair value estimate at the time of this writing is $3 per share. Shares are down nearly 8% today at
Johnson & Johnson Remains One of Our Favorite Dividend Growth Gems
October 15, 2013
On Tuesday, Dividend Growth Newsletter portfolio holding Johnson & Johnson (click ticker for report: ) issued solid third-quarter results and raised its full-year earnings guidance. The firm’s domestic sales jumped 1.7% while international sales leapt more than 4% from last year’s period (consolidated sales were 3.1% higher—4.7% adjusted for negative currency impacts). We were particularly pleased with performance from J&J’s pharmaceutical division, which experienced operational revenue growth of 10%+ thanks to strength from antipsychotic INVEGA SUSTENNA, REMICADE, SIMPONI, and STELARA. Diluted earnings per share advanced nearly 9% on a year-over-year basis, to $1.04. Looking ahead, we were also quite pleased with the company’s outlook for the remainder of 2013. Johnson & Johnson upped its earnings guidance for the year to
Mortgage Originations Decline at Major Banks
October 15, 2013
Two of the US’ most important financial institutions reported third-quarter results Friday morning. The stories were slightly different, but equally fascinating. Let’s take a look at how these banks performed after passing their self-administered stress tests. JP Morgan JP Morgan’s (click ticker for report: ) third quarter results were relatively solid in spite of a laundry list of legal problems. Book value declined slightly sequentially to $52.01 per share, though that number is an increase of 4% year-over-year. Earnings per share, adjusted for litigation expenses and reserve releases, were roughly flat year-over-year at $1.40 per share. Year-to-date, the firm has achieved a return on equity of 11% — above our estimate of its cost of capital. Capital Ratios The Basel
Valuentum’s October Edition of Its Best Ideas Newsletter!
October 15, 2013
How We’re Prepared for the Debt Ceiling Deadline, by Brian Nelson, CFA The debt-ceiling debate of 2011, the resulting 11th-hour agreement of that episode, and the massive stock rally that followed has created a sense of reassurance in the investment community that everything will somehow be alright. Such a stance, in our view, is unfounded. With stock valuations now significantly stretched (see: Keeping Some Dry Powder), there’s no longer underlying valuation support for the broader equity markets to move higher as they did since 2011 — when all of our significant outperformance in the Best Ideas portfolio was generated. We’ll be watching events closely during the next few days (the deadline is October 17), but one thing is clear —
